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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Gasoline futures swung to a five-month low of $1.2760 gallon in ending July business before paring the decline on technical-driven short covering ahead of the August contract expiration, with the low plumbed during peak seasonal driving demand in the United States amid a market awash in supply.
The national inventory of gasoline increased during July, and at a time when stocks are typically drawn down amid strong summer demand. The gasoline buildup was unexpected, and has upended a widely held outlook that the global market would reach a balance between supply and demand sometime during the second half of 2016.
US gasoline supply increased during each of the three weeks through July 22, according to the most recent data from the Energy Information Administration, and in six of the past eight weeks, as refiners ramped up output and imports surged. EIA shows national gasoline inventory at 241.5 million bbl on July 22, the most since the end of April, and 25.5 million bbl or 11.8% above year prior.
Gasoline Demand
Preliminary demand data from EIA shows gasoline supplied to market at a record pace so far in 2016, slipping below the year ago weekly rate only three times since mid-May. Cumulatively, US implied gasoline demand has averaged 9.418 million bpd in 2016 through July 22, 336,000 bpd or 3.7% above the comparable year ago period and an astounding 614,000 bpd or 7.0% more than the five-year average.
The strong demand rate demonstrates gasoline’s elasticity, with low retail prices and declining unemployment prompting more road travel. The Federal Highway Administration shows the 12-month annual vehicle-distance traveled on US roads at an all-time high of 3.171 billion miles in May, the latest data available, 3.4% above May 2015.
Yet, the demand rate is still not strong enough to work down inventory, in part due to a high rate of refinery production of gasoline that averaged 9.69 million bpd cumulatively from Jan. 1 through July 22, 208,200 bpd or 2.2% more than during the same time period in 2015.
After the weekly average topped 10.0 million bpd for the first time in March 2015, US refineries have produced above the benchmark nine times so far in 2016 compared with a total of four for all of 2015, including six weeks out of the past eight weeks through July 22, EIA data shows.
US refiners shifted their yield away from distillates and to gasoline early in 2016 because of a lack of demand for heating oil during a mild winter, with an abundance of low costing crude prompting refiners to process at a higher run rate. This triggered a steep 22.3 million bbl or 4.1% drawdown in US commercial crude oil inventory from an 86-year high of 543.4 million bbl from the end of April through July 22, which also had the result of pushing some of the supply overhang from crude oil to gasoline.
US Gasoline Imports
Another dynamic has been US gasoline imports, with the rate of overseas supply sent to US shores picking up pace in the second quarter, averaging 817,235 million bpd from April 1 through July 22 data from the EIA shows, which is 114,412 bpd or 16.3% more than during the comparable period in 2015.
A strong dollar has lured more imports to US shores. Increased refining capacity in the Middle East and Asia has also boosted the amount of available gasoline supply globally, heightening competition among suppliers.
The majority of gasoline imports over the period, 88%, were received along the PADD 1 East Coast. Averaging 729,177 bpd from April 1 through July 22, East Coast gasoline imports were 118,411 bpd or 19.4% more than during the comparable year ago period.
That, in turn, helped to push East Coast gasoline inventory through July 22 to 72.5 million bbl–the highest point since at least 1990, the year EIA began breaking out weekly PADD supply totals. On July 22, East Coast gasoline supply was 12.5 million bbl or 20.8% more than year prior.
The oversupply erased the traditional backwardation in the nearest two delivery months from May through July and pressured the refiner gasoline crack spread–the margin received from processing crude oil into gasoline. The weak refiner returns spurred talk in late July that some refiners would switch to processing winter gasoline well in advance of the transition to higher Reid vapor pressure rates that begin in September.
The inability to drawdown US gasoline inventory during peak season demand also knocked out a pillar of support for an outlook calling for a tightening global supply-demand disposition during the latter half of the year, a key factor in the oil market’s selloff in July. The outlook suggested low oil prices would reduce crude production while also lifting demand to a point that would begin sparking global oil supply drawdowns.
US crude production
US crude production did decline to its lowest point in 25 months on July 1 at 8.428 million bpd, but has since increased to 8.518 million bpd. Overseas, crude production by the Organization of the Petroleum Exporting Countries grew to its highest rate in recent memory in July at 33.41 million bpd. Meanwhile, global oil demand has been lackluster overall due to economic headwinds, with strong demand anticipated from China and India falling short of expectations.
On the first day of August, nearest delivered West Texas Intermediate futures traded on the New York Mercantile Exchange slipped below $40 bbl for the first time since mid-April, now trading in bear market territory. The selloff is not seen to have run its course, with additional price pressure expected in the fall as refiners idle processing units for seasonal maintenance, cutting into demand for crude oil.
The US average for regular grade gasoline fell for the seventh consecutive week through Aug. 1 to $2.159 gallon, the lowest the average has been since mid-April, data from the EIA shows. The weekly average is down 24cts or 10% since mid-June when it reached a nine-month high of $2.399 gallon.
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